Inflation is still high, resulting in increased costs for well completion and production activities. This is hurting the bottom line of oilfield service players. Strict capital discipline by upstream energy companies is also acting as a dampener, making the outlook for the Zacks Oil and Gas- Field Servicesindustry gloomy.
Among the companies in the industry that will probably survive the business challenges are SLB SLB, Halliburton Company HAL, Weatherford International plc WFRD and Oceaneering International, Inc. OII.
About the Industry
The Zacks Oil and Gas - Field Services industry comprises companies that primarily engage in providing support services to exploration and production players. These companies help in manufacturing, repairing and maintaining wells, drilling equipment, leasing of drilling rigs, seismic testing, and transport and directional solutions, among others. Also, the firms help upstream energy players locate oil and natural gas and drill and evaluate hydrocarbon wells. Hence, oilfield services businesses are positively correlated to expenditures from upstream firms. Furthermore, with countries worldwide investing heavily in liquefied natural gas (LNG) terminals, a few oilfield service companies are extending their reach beyond the hydrocarbon fields and capitalizing on contracts for manufacturing equipment used in LNG facilities to decrease carbon emissions.
3 Trends Defining the Oilfield Services Industry's Future
Inflation Remains Elevated: Persistently high inflation levels and the slim likelihood of reverting to pre-pandemic conditions in the short term are contributing to increased costs for well completion and production activities, as well as drilling and evaluation services. This is hurting the bottom line of oilfield services players.
Lower Upstream Spending: Although the commodity pricing scenario is favorable for exploration and production operations, there has been a slowdown in drilling activities, which may continue as upstream players are prioritizing stockholder returns rather than boosting output. Drilling activity slowdown signifies lower demand for oilfield services as oilfield service players mainly assist upstream companies in setting up oil and gas wells.
Low Dividend Yield: While companies in the industry prioritize returning capital to shareholders, oilfield service players have consistently offered lower dividend yields than the broader energy sector in the last three years. This poses a challenge for investors seeking steady income from their investments.
Zacks Industry Rank Indicates Bearish Outlook
The Zacks Oil and Gas – Field Services is a 22-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #194, which places it in the bottom 23% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Before we present a few stocks that you may consider, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Lags S&P 500, Outperforms Sector
The Zacks Oil and Gas – Field Services industry has lagged the Zacks S&P 500 composite but outperformed the broader Zacks Oil – Energy sector over the past year.
The industry has soared 13.3% over this period compared with the S&P 500’s gain of 17.7% and the broader sector’s 1.2% decline.
One-Year Price Performance
Industry's Current Valuation
Since oil and gas companies are debt-laden, it makes sense to value them based on the EV/EBITDA (Enterprise Value/Earnings before Interest Tax Depreciation and Amortization) ratio. This is because the valuation metric takes not just equity into account but also the level of debt. For capital-intensive companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of non-cash expenses.
On the basis of the trailing 12-month EV/EBITDA, the industry is currently trading at 8.16X compared with the S&P 500’s 13.21X and sector’s 3.67X.
Over the past five years, the industry has traded as high as 12.37X and as low as 1.00X, with a median of 8.21X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
4 Oilfield Services Stocks Moving Ahead of the Pack
SLB: SLB is well known for transforming the oil and gas industry by employing its cutting-edge solutions. With its quantifiably proven solutions, it is lowering emissions and related impacts. SLB, carrying a Zacks Rank #3 (Hold), is likely to see earnings growth of 36.2% this year.
Price and Consensus: SLB
Weatherford is a key energy player and is engaged in offering exclusive drilling technologies that will maximize clients’ reservoir exposure. Weatherford is also involved in well construction and completion activities in an efficient manner. WFRD currently carries a Zacks Rank #2 (Buy).
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: WFRD
Halliburton Company: Halliburton is also a leading oilfield service player, capitalizing on improving demand for oilfield services. HAL is expecting growth in the international market, while values in the North American market are getting maximized. The firm, with a Zacks Rank of 3, is likely to see earnings growth of more than 42% this year.
Price and Consensus: HAL
Oceaneering International: Oceaneering is banking on improvement in pricing in Offshore Projects Group and Subsea Robotics business segments. Operating results from the company’s Aerospace and Defense Technologies are also aiding the bottom line.
Carrying a Zacks Rank #2, OII is likely to see earnings growth of more than 177% this year.
Price and Consensus: OII
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